Improving Working Capital by Moving from B2B to B2C
Why Business to Customer?
In retail industry, bargaining power of the client when we go downstream in the value chain is well noticed. While the weight of this power varies with the position of the client in value chain, retailers remain the strongest since they sell goods to the end consumer. Retailers dictate extended payment terms, push for big discounts, stipulate Vendor Managed Inventory (VMI), impose marketing and merchandizing expenses on the distributor. On the other hand, the distributor will regularly suffer from low working capital due to high accounts receivables aging, short accounts payable cycle, and low inventory turnover ratio due to the push supply chain model. Speaking about bottom line, the tight profit margins caused by big discounts, write-off of bad debts, and expired and nonmoving inventories will enormously hit the P&L of the distributor.
In today’s developed world, marked by the vast and prompt growth of e-commerce solutions, clouding and electronic payment channels, we as supply chain managers have the right to ask, why don’t distributors switch to B2C instead of B2B using online sales channel? If distributors adapt such strategy, the below benefits immediate benefits can be achieved:
1.?????Move from push to pull inventory model, whilst increasing inventory turnover.
2.?????Reduce accounts receivables aging to zero days versus 90 days industry average.
3.?????Improve bottom line due to full claim of profit margin.
But this will not take place by switching the button, moving to B2C strategy will require proper functional strategies that supports this transfer.
In the below remaining part, I will be discussing how B2C strategy can be achieved to improve working capital and sustain cash. I will be taking colored contact lenses industry as an example, due to it forms ideal example for the introduced concepts, in addition to my more than 10 years’ experience in this industry.
Eliminate, Reduce & Raise Strategy
To improve and sustain high working capital, organization shall apply the Eliminate, Reduce and Raise Strategy. We eliminate the factors that industry takes them for granted, raise other factors well above industry standards while reducing others to be below the standards. If we apply these concepts to contact lenses industry, the below can be achieved:
§?Eliminate bargaining power of the leading chains and optic shops for reduced prices while raising gross profits and operating income. This is leveraged by selling goods to end consumer at retail price.
?So, what about functional strategy?
?Logistics & Transportation-The Power of 3PL
For any sales-oriented company, concentration should be on core competency to generate revenues. The recommended B2C model requires leaving the logistics part to third party companies that have delivery and storage as core competencies and capable of building scalability. These third-party companies have the specialization, expertise and technology that allows them to apply economy of scale and reduce errors. Services provided by these companies to sales-oriented organizations can be summarized as below:
Back to Eliminate, Reduce and Raise strategy, the below can be achieved when applying 3PL:
Marketing & Business Development
Since B2C will be achieved by adapting online sales channel, marketing strategy shall shift to digital marketing of the products. Back to our contact lenses example, applying digital marketing will help achieve the below:
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All the above points support Growth Hacking Funnel Strategy, to increase awareness, acquire new users, retain clients’ base, improve referrals, and sustain profits.
Can This be Implemented in Any Time at Any Place?
The important question is, can this be applied in any region or geography? Moving to online sales as one single channel requires robust IT and communication infrastructure in addition to reliable/trustable online payment channels and banking solutions, so is this available everywhere? The answer is certainly no, where this requires a detailed PESTEL study for the region before moving to this strategy. If we take Saudi Arabia market for our contact lens example, the Technological part of PESTEL analysis would reveal the below:
????? Credit card penetration percentage is 16% compared to 19% worldwide.
? Banked population reached 72% versus 67% worldwide.
41% of the payments are card payments.?
Outside the technological aspect of the PESTEL, Saudi Arabia is ranked 43 worldwide in terms of logistics and infrastructure quality According to logistics Performance Index published by world bank, which makes it an ideal factor for the logistics strategy that had been explained earlier.
By January 2021, social media users in Saudi Arabia reached 27.08 million which is equivalent to 79.3% of the population, which will contribute heavily to the marketing strategy.
?Conclusion
“Revenue is vanity, profit is sanity, but cash is king.”
Cash is the King of All Assets.
Why are we targeting cash and working capital in the article?
No matter the volume of non-liquid assets a company owns, cash is the only asset that allows the company to pay its employees, suppliers, debtors, shareholders, taxation authorities and all other stakeholders.
No matter the amount of sales revenues a company achieve, low DSO (Days Sales Outstanding) is the only strategy that improve cash flow. Keep in mind that a company is evaluated by its forecasted cashflow and not forecasted sales.
?“It is so easy to change cash into inventory, challenge is to change inventory back into cash.”
The main goal behind “eliminate” and “raise” strategy we applied was to improve and sustain cash by reducing DSO to zero days and improve cash conversion cycle of inventory. Once cash in sustained, business is sustained, keeping in mind that most important party in the business is the business itself, not the client, cause when business falls it will not serve the client.